Financial Markets Mounting an Improbable Comeback

Posted on May 11th, 2020

Stocks Ballooning Despite Recession

Equities are in rebound mode since April, recapturing some of the losses suffered in March. Stocks were enhanced by reopening prospects and stimulus efforts targeting businesses. All eleven sectors composing the S&P 500 Index were positive in April, a strong reversal relative to March. Health Care, Technology, and Consumer Staples were among the top performing sectors for the month. The collapse in U.S. oil prices, as measured by West Texas Intermediate (WTI), drove energy related stocks lower producing dismal revenue and profit expectations.

Earnings dominated equity markets as corporate earnings have become a barometer of the impact that the pandemic is having on the economy. Analysts are struggling to explain the divergence between an economic recession vs a buoyant stock market, with equites propelling higher in April as dismal economic data points to subdued growth.

Rates Stabilize Due To Stimulus

The Fed pledged its continued support for the economy in the form of fixed income purchases including government bonds, mortgages, and various ETFs. The Fed also resorted to buying junk bonds in the open market, as well as continuing to buy unlimited amounts of U.S. government bonds and mortgage backed securities. Lending facilities were also extended to corporations and municipalities helping to support the corporate and municipal bond markets.

The U.S. Treasury is expected to issue over $2 trillion in short-term Treasury bills this year, with the intention of selling additional billions of dollars of longer term notes and bonds to subsidize the massive stimulus efforts underway.

An increase in the money supply, as measured by M2, rose to over $17.2 trillion as of April 20th, up from $15.5 trillion on February 24, 2020. The rapid increase is a result of the massive fiscal and monetary stimulus infused in order to stem the effects of the pandemic.

Both short-term and long-term yields have fallen as massive stimulus efforts have buoyed the bond markets. The yield on the 10-year Treasury bond ended April at 0.64%, with the yield on the 2-year Treasury ending the month at 0.20%. All bond sectors are positive for the year, outperforming all equities indices since the beginning of the year.

Sources: S&P, Bloomberg, Federal Reserve, U.S. Treasury